Tax Relief Opportunities to Leverage on for Hong Kong Businesses

Hong Kong is one of Asia’s known tax havens. It has one of the world’s most enterprise-friendly tax schemes that follows a straightforward, low-rate tax structure. Taxation in Hong Kong is proportional to income, while businesses here are subjected to a unique profits tax. And for a lot of prospects looking to start a business in the region, many are eager to know what are some of the tax reliefs they can make use of.   

Read more: Why You Should Set Up a New Business in Hong Kong This Year 

In this article, we shall be talking about what you need to know about profits tax in Hong Kong. Then, let’s explore several tax reliefs and incentives for businesses set up in Hong Kong. 

About Hong Kong Profits Tax  

• Who is liable to pay Profits Tax? 

Tax is imposed on partnerships, corporations, trustees and people who are engaged in trades, professions or businesses run in Hong Kong. 

• What are the rates? 

Corporations in Hong Kong are subject to a statutory tax rate of 16.5% on assessable profits whereas unincorporated firms are charged at 15%.    

With effect from the year of assessment 2018/19,  a Two-Tiered Profits Tax Regime has been implemented. The Two-Tiered Profits Tax Regime lowers the tax rate for the first HK$2 million of assessable profits for both corporations and unincorporated companies to 8.25% and 7.5% respectively and it aims to significantly reduce the tax burden of most tax-paying small and medium-sized enterprises (SMEs). 

The Two-Tiered rates are available to only one “entity” within a group of “connected entities” for a given year of assessment.

• The Territorial Source Principle of Taxation 

Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax.

Corporations (either domestic companies or foreign companies), partnerships, trustees and bodies of persons carrying on a trade, profession or business in Hong Kong are subject to tax on Hong Kong-source profits (excluding profits arising from the sale of capital assets).  

• Are dividends and capital gains taxable? 

Dividends and capital gains are generally not taxable. 

Dividends paid from profits that are already subjected to Hong Kong tax are not taxable in the hands of shareholders. Dividends received from foreign companies are not taxable as they are not Hong Kong-source income.

While there is no capital gains tax in Hong Kong, gains from the disposal of assets may be considered as trading gains which are taxable under profits tax if the disposal constitutes a transaction in the nature of trade.

Hong Kong Tax Reliefs & Incentives 

The Hong Kong SAR government offers several preferential tax regimes to encourage different industries or activities. Let’s look at some of them below: 

• Enhanced tax deduction for Research and Development (“R&D”) expenditures

• Tax exemption for privately offered onshore and offshore funds for transactions on specified assets 

• Tax Concession (0% tax) for carried interests received by a qualifying recipient from the provision of investment management services in Hong Kong for a certified investment fund

• Concessionary tax rate of 8.25% for qualifying profits derived by a qualifying corporate treasury center
• Tax exemption for gains from qualified debt instrument 
• Concessionary tax rate of 8.25% for profits derived from the business of reinsurance of onshore and offshore risks and qualifying onshore and offshore captive insurance businesses
• Concessionary tax rate of 8.25% for qualifying aircraft leasing activities and qualifying aircraft leasing management activities
• Concessionary tax rate of 0% for qualifying profits derived from qualifying ship leasing activities 
• Concessionary tax rate of 0% or 8.25% for qualifying profits derived from qualifying ship leasing management activities

Furthermore, foreign tax credits can be claimed if foreign taxes are payable/paid by a Hong Kong tax resident on income derived from a territory that has entered into a Double Taxation Agreement with Hong Kong SAR and the same income is subject to tax in Hong Kong.

Reach out to Ledgen Group today for more information and in-depth expert advice on Hong Kong tax relief opportunities. 

Conclusion 

Businesses are encouraged to start or expand their business in Hong Kong thanks to the attractive tax schemes and incentives provided. But managing tax compliance can be tricky especially when you’re growing your business in a new country. This is why getting tax professionals for advisory and outsourced assistance could benefit you in the long-run.  

Ledgen Group is a trusted partner for tax and statutory compliance, with operations in key Asian cities including Hong Kong. Contact us today to outsource your tax operation the right and efficient way.   

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